Question 1

Ford Motor is evaluating an extra dividend versus a share repurchase. In either case $20,000 would be spent. Current earnings are $6.0 per share, and the stock currently sells for $40 per share. There are 4,000 shares outstanding. Ignore taxes and other imperfections in answering parts (a) and (b).

a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth.

b. What will be the effect on Ford Motors EPS and PE ratio under the two different scenarios?

c. In the real world, which of these actions would you recommend? Why?

Question 2

Morgan Stanley has a current cash flow (at time 0) of $3.4 m and pays no dividends. The present value of the companys future cash flows is $14.6 m. The firm is entirely financed with equity and has $400,000 shares outstanding. Assume the dividend tax rate is zero.

a. What is the share price of Morgan Stanley stock?

b. Suppose the board of directors of Morgan Stanley announces its plan to payout 40% of its current cash flow as dividends to its shareholders. How can Andy, who owns 800 shares of Morgan Stanley stock, achieve a zero payout policy on his own?